UPDATE 8-Oil gains more than $2, Brent rebounds from 16-month low

Wed Sep 3, 2014 6:41pm EDT

Related Topics

* Russia outlines ceasefire plan, Ukraine dismisses it

* Dollar index eases from 14-month high

* Coming up: EIA inventory data 11:00 a.m. EDT (1500 GMT) (Updates with API data)

By Anna Louie Sussman and Robert Gibbons

NEW YORK, Sept 3 (Reuters) - Crude oil prices rose by more than $2 a barrel on Wednesday off multimonth lows as the prospect of peace talks between Ukraine and Russia combined with strong U.S. economic data raised demand expectations.

New orders for U.S. factory goods jumped in July and automobile sales in August were unexpectedly robust, offering further signs of strength in the manufacturing sector.

President Vladimir Putin outlined plans for a ceasefire in eastern Ukraine on Wednesday but Ukraine's prime minister dismissed the proposal, while France expressed its disapproval of Moscow's support for separatist forces by halting delivery of a warship.

After speaking to Ukrainian President Petro Poroshenko by phone, Putin said he believed Kiev and pro-Russian separatists could reach agreement at planned talks in Minsk on Friday.

"If the ceasefire holds, sanctions will be lifted and that will mean more economic activity. We've gone from a situation where we'd lowered demand expectations to rising demand," said Phil Flynn, an analyst at the Price Futures Group in Chicago.

U.S. crude settled up $2.66 at $95.54 a barrel, recapturing nearly all of the more than $3 it shed on Tuesday when it neared a nine-month low. Markets were closed on Monday for a U.S. holiday.

Brent crude rose by $2.43 to settle at $102.77 at 11:41 a.m. EDT (1541 GMT) after settling at its lowest since May 1, 2013, on Tuesday.

A weaker dollar and expectations of a decline in U.S. crude inventories further supported oil prices, which on Tuesday had plummeted in reaction to a sharp gain in the dollar and concerns over slowing oil demand growth in China and Europe.

"You would expect the market to bounce after such a major downward move yesterday," said Tony Machacek, a broker at Jefferies in London. "Fundamentally, the oil market is well supplied and the indications are prices are still in a downtrend."

Investors have mostly discounted threats to supplies from conflict in the Middle East and North Africa, focusing instead on the lack of further disruption to oil flows in Iraq and rising output in Libya.

After the session close on Wednesday, industry group the American Petroleum Institute reported U.S. crude inventories fell only 545,000 barrels to 361 million last week as refinery capacity utilization fell 0.5 percentage point to 93.2 percent.

Brent and U.S. crude and U.S. gasoline and heating oil futures all pared gains after the API released its data.

The more closely watched update from the government's Energy Information Administration is due at 11:00 a.m. EDT (1500 GMT) Thursday. It is delayed by one day due to the Monday U.S. holiday.

U.S. crude oil and refined product stockpiles were forecast to have dropped in the week to Aug. 29, an expanded Reuters survey of 10 analysts showed on Wednesday. (Additional reporting by Alex Lawler and Jacob Gronholt-Pedersen; editing by Michael Urquhart, G Crosse, Jane Baird, Andrew Hay and Diane Craft)

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